1. How can the value of a bachelor’s degree increase even if bachelor degree salaries decrease?2. What do the authors say about the relevance of the cost of living (food, housing, transportation, clothing) to the main question of the paper?3. Why do the authors omit college loans from their analysis? (Look for the footnote.)4. Although tuition has been rising quickly, what qualification connected to tuition do the authors tell us is relevant to take into consideration?5. What is chronic underemployment? For the group that ends up chronically underemployed is college worth it? What do the authors do to answer this question?6. The study also looks at returns by major. Since not everyone would succeed in a high return major, what does that mean for the interpretation of the returns by major? Explain.7. Does the study take into account those who start college, but do not finish?
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Volume 20, Number 3 ❖ 2014 ❖ www.newyorkfed.org/research/current_issues
IN ECONOMICS AND FINANCE
FEDERAL RESERVE BANK OF NEW YORK
Do the Benefits of College Still Outweigh
Jaison R. Abel and Richard Deitz
In recent years, students have been paying more to attend
college and earning less upon graduation—trends that have
led many observers to question whether a college education
remains a good investment. However, an analysis of the
economic returns to college since the 1970s demonstrates that
the benefits of both a bachelor’s degree and an associate’s degree
still tend to outweigh the costs, with both degrees earning a
return of about 15 percent over the past decade. The return has
remained high in spite of rising tuition and falling earnings
because the wages of those without a college degree have also
been falling, keeping the college wage premium near an all-time
high while reducing the opportunity cost of going to school.
he sluggish labor market recovery from the Great Recession has refueled
the debate about the value of a college degree. Although the unemployment
rate of college-educated workers has remained well below average, there is
mounting evidence that recent college graduates are struggling to find good jobs.1
At the same time, college tuition has risen sharply, reaching record highs, and college graduates are increasingly finding themselves saddled with debt from student
loans used to finance their education. By the end of 2013, aggregate student loan
debt in the United States exceeded $1 trillion, and more than 11 percent of student
loan balances were either severely delinquent or already in default.2 With the costs
of college rising and the benefits in doubt, many are wondering whether earning a
college degree still pays.
In this edition of Current Issues, we examine the costs, benefits, and economic return of a college education. By analyzing more than four decades of
data, we are able to put the recent experience of college graduates—those with
either a bachelor’s degree or an associate’s degree—into historical perspective.
Our analysis reveals that the average wages of college graduates have been falling for the better part of a decade, with the pace of decline accelerating after the
Great Recession. Further, we show that tuition has increased sharply over time,
although average costs are typically much lower than the published “sticker
price” would suggest because of the wide availability of student aid and tax
benefits. Nonetheless, while it might seem as if the value of a college degree has
declined because of falling wages and rising tuition, we show that this is actually not the case. Instead, after climbing impressively between 1980 and 2000,
the return to a college degree has held steady for more than a decade at around
1 See Abel, Deitz, and Su (2014).
2 See Federal Reserve Bank of New York (2014).
CURRENT ISSUES IN ECONOMICS AND FINANCE ❖ Volume 20, Number 3
15 percent, easily surpassing the threshold for a sound
investment. The driving force behind this seeming contradiction is that the wages of those without a college degree have
also been falling, keeping the college wage premium near an
all-time high while reducing the opportunity cost of going to
school. Indeed, while the past decade has been a challenging
time for college graduates, those with less education have
struggled even more.
Finally, we investigate whether the return on a bachelor’s
degree varies with students’ areas of specialization. Perhaps
not surprisingly, we find that the return differs markedly
across college majors. In particular, students majoring in fields
that provide technical training, such as engineering or math
and computers, or fields geared toward growing parts of the
economy, such as health care, have tended to earn high returns
on their educational investments. By contrast, many students
majoring in fields such as leisure and hospitality, agriculture,
architecture, or the liberal arts have tended to fare worse, particularly if they find themselves chronically underemployed.
Thus, while the benefits of college still outweigh the costs on
average, not all college degrees are an equally good investment.
Economic Benefits of College
The economic benefits of a college degree can be thought of
as the extra wages one can earn with a college degree relative
to what one would earn without one. We measure this wage
differential by comparing the average wages earned by college graduates with the average wages earned by high school
graduates. The wage differentials we estimate provide only a
rough guide to the economic benefits of a college degree, and
come with a few important caveats. First, as a group, those
pursuing a college degree may well have aptitudes, skills, and
other characteristics that make them different from those
who do not go on to college. This implies that part of what
we estimate as a benefit to a college degree may reflect the
different abilities of those who earn a college degree, and not
the added value of a college education itself. Furthermore,
our analysis is based on the historical earnings of college
and high school graduates who entered the labor market at
different points in time, and there is no guarantee that these
earnings patterns will hold in the future. Finally, the results
we present are average outcomes. Thus, by definition, some
individuals will have better or worse outcomes than our
We utilize data from the March supplement of the Current Population Survey to calculate average annual wages
between 1970 and 2013 for three groups of workers: those
with only a high school diploma (including workers who
earned a GED), those with only an associate’s degree, and
those with only a bachelor’s degree.3 We exclude those
Average Annual Wages, by Education
Thousands of dollars
High school diploma
Sources: U.S. Census Bureau and U.S. Bureau of Labor Statistics, Current
Population Survey, March Supplement; U.S. Bureau of Labor Statistics, consumer
Notes: Dollar figures are expressed in constant 2013 dollars. Wages are adjusted
to control for differences in worker characteristics. The shaded areas indicate
periods designated recessions by the National Bureau of Economic Research.
with a graduate degree from our analysis in order to focus
on the return to a bachelor’s degree in and of itself. However, it is important to note that those with a postgraduate
education tend to earn more than those with only a bachelor’s degree, so part of the payoff to a bachelor’s degree
is its utility as a stepping stone to a postgraduate degree.4
These gains are not captured in our analysis.
To obtain comparable wage estimates for workers in each
education group, we restrict our sample to full-time workers
aged sixteen to sixty-four. Thus, our analysis excludes those
who are unemployed or are working part-time. This restriction
tends to understate the wage benefits of a college degree since
those with only a high school education are more likely to be
unemployed or to work part-time than those with a college
degree, and this gap has widened over time.5 We use regression
models to control for differences in observable characteristics of
people over time and across education groups, and express all
figures in constant 2013 dollars using the consumer price index
to adjust for inflation (see Box). In essence, these restrictions
and adjustments allow us to calculate wages for the average
worker within each group that are comparable over time.
The College Wage Premium
As one might expect, average wages for those with a college degree
are far greater than average wages for those with only a high
school diploma (Chart 1). In the period between 1970 and
2013 as a whole, those with a bachelor’s degree earned about
4 See Lindley and Machin (2013).
3 See Ruggles et al. (2010).
5 See Abel, Deitz, and Su (2014).
Estimating Average Wages Using a Fixed
We use a linear regression model to estimate average wages that
control for differences in observable characteristics of workers
between education groups and over time. Specifically, for each
individual i, we estimate the following wage equation separately
for each education group and year:
wi= βXi + εi ,
iis an individual’s annual wages; X
iis a vector of
individual-level characteristics, including age, age-squared, race,
marital status, gender, and the U.S. Census division in which each
individual is located; β is a vector of corresponding parameter
estimates; and ε iis a standard error term. With three education groups and forty-four years of data, we estimate this model
132 times using cross-sectional microdata on individual workers.
To estimate the average wages shown in Chart 1, we evaluate
the regression model using the 2013 mean value of each independent variable to obtain a fitted wage value for each education
group and year. The means of all independent variables are calculated using the combined sample of all workers for the year 2013.
Thus, the average wage values we estimate are driven by variation
in the estimated coefficients over time. Fixing the average worker’s
characteristics to 2013 values allows us to take the characteristics
of today’s workforce and recast prior years to fit these same demographics. For example, the labor market experience of women
differs in various ways from that of men. With the rise in female
labor force participation over the past few decades, women’s share
of the workforce is higher today than it was in 1970. Our approach
allows us to account for this difference by using the share of
women in the workforce today to estimate average wages in prior
years when the demographics were different.
We also use the results from these equations to estimate
lifetime earnings profiles for each education group and year, as
depicted in Chart 2 for the year 2013. Here, we use the results
obtained from the regression equations, again holding the independent variables constant at their 2013 mean values, with the
exception of age and age-squared. We then substitute age values
to predict the average wage of each type of worker at each age of
their working life. Since our data are cross-sectional, we do not
follow individuals over time to see how their earnings change;
rather, we observe what people of various ages earn in a given
year. Thus, the lifetime earnings profiles we estimate rely on the
wage outcomes of people at different ages in a particular year
to predict what one could expect to earn during a lifetime. For
example, the 1990 lifetime earnings profile yields an estimate of
the average wage a person with a certain level of education might
expect to earn at age twenty, thirty, forty, and fifty, based on what
twenty-, thirty-, forty- and fifty-year-old workers with that same
level of education typically earned in that same year.
$64,500 per year and those with an associate’s degree earned
about $50,000 per year, while those with a high school
diploma earned only $41,000 per year. Thus, over the past
four decades, those with a bachelor’s degree have tended to
earn 56 percent more than high school graduates while those
with an associate’s degree have tended to earn 21 percent
more than high school graduates.6 However, these wage
premiums have fluctuated over time.
Average Wages over Time
Perhaps somewhat surprisingly, the average wage of workers with a bachelor’s degree does not always rise—in fact, it
spent as much time declining as increasing during the past
four decades. Consider first the 1970s. Although wages drifted
down for all workers between 1970 and 1982, those with a
bachelor’s degree saw their wages decline the fastest. Average
wages for this group fell from a little more than $60,000 to
about $56,000, or 8 percent—nearly double the rate of decline
in wages for those with either an associate’s degree or a high
school diploma. In fact, the falling wages of workers with a
bachelor’s degree during the 1970s raised concerns that the
large number of people going to college had produced an
overeducated workforce.7 However, circumstances changed
dramatically in the early 1980s.
The wages of college graduates increased sharply in both
absolute and relative terms beginning in the early 1980s and
continuing through the 1990s. In many ways, these may well
have been the “golden years” for college graduates. As technological advancement and the computer revolution took hold,
the demand for skilled workers steepened. Indeed, although
college enrollment grew steadily during this time, the demand
for college-educated workers increased even more.8 Further,
the introduction of new technologies helped college graduates
become more productive.9 These forces combined to push
wages up rapidly for college graduates. Between 1982 and
2001, the average wage earned by workers with a bachelor’s
degree jumped 31 percent and the average wage for those
with an associate’s degree rose 12 percent, while the average
wage for a high school graduate was essentially unchanged.
As a result, the wage premium earned by those with a college
degree doubled over this period, reaching nearly 80 percent
for workers with a bachelor’s degree and almost 30 percent for
those with an associate’s degree.
Since then, however, it has been a challenging time for all
workers, and the prospects of college graduates have once
6 Although wage dispersion has increased over time for all three education
groups, the college wage premium measured at the 25th, 50th, and
75th percentiles is nearly identical to the college wage premium measured at
the means for the entire 1970-2013 time period.
7 See Freeman (1976).
8 See Goldin and Katz (2008).
9 See Autor, Levy, and Murnane (2003).
CURRENT ISSUES IN ECONOMICS AND FINANCE ❖ Volume 20, Number 3
Life-Cycle Wage Profiles, by Education
well over $1 million more than high school graduates during
their working lives, while those with an associate’s degree earn
about $325,000 more.11
Thousands of dollars
Economic Costs of College
High school diploma
Source: U.S. Census Bureau and U.S. Bureau of Labor Statistics, Current
Population Survey, March Supplement.
Note: Wages are adjusted to control for differences in worker characteristics.
again come into question. Between 2001 and 2013, the average
wage of workers with a bachelor’s degree declined 10.3 percent, and the average wage of those with an associate’s degree
declined 11.1 percent; for high school graduates, the average wage dropped a more modest 7.6 percent. It is not clear
whether this trend is a consequence of the two recessions and
jobless recoveries that came in close succession beginning
in the 2000s, or a more permanent reversal in the demand
for the skills of college graduates.10 However, even with the
recent decline in wages, those with a bachelor’s degree have, on
average, continued to enjoy a 75 percent wage premium, while
those with an associate’s degree still earn over 20 percent more
than high school graduates. As we explain in detail later, these
wage differentials are a critical component in determining
whether a college degree remains a good investment.
Significantly, the economic benefits associated with earning
a college degree last over an entire lifetime. Chart 2 shows the
life-cycle wage profiles for each education group using 2013
data. These wage profiles can be used to estimate expected
lifetime earnings by adding up the wages a worker typically
earns over his or her career (see Box). For simplicity, we assume
that all workers retire at age sixty-five and that those who, as
students, pursued a college degree followed the traditional fulltime path—taking two years to complete an associate’s degree
or four years to complete a bachelor’s degree—and did not earn
wages while enrolled in school. Despite entering the labor force
at a later age, workers with a bachelor’s degree on average earn
10 See Beaudry, Green, and Sand (2013).
As with all investments, a college education requires paying
some upfront costs in order to capture the expected benefits
that accrue over the lifetime of the investment. In this section,
we estimate these costs for the typical college student. We
measure two components of the costs associated with obtaining a college education. The first is direct costs, which include
the out-of-pocket expenses associated with attending college
that would not otherwise be incurred. Tuition is the clearest example of a direct cost. By contrast, room and board—
another large expense commonly associated with attending
college—needs to be paid regardless of whether someone
decides to go to college, so it is not considered a direct cost
of college from an economic perspective. The second type of
cost is an opportunity cost, which represents the value of what
someone must give up to attend college. For most people, the
opportunity cost of a college education is equivalent to the
wages that could have been earned by working instead of going
To measure the direct costs of college, we rely on information
from the College Board and the U.S. Department of Education.
These sources provide data on the average tuition and fees paid
by undergraduate students at two-year institutions, which primarily produce associate’s degrees, and four-year institutions,
which primarily produce bachelor’s degrees. While published
tuition and fees represent the “sticker price” for attending college, many students, if not most, do not actually pay this price.
Because of the many forms of financial aid students receive,
including grants from the institutions themselves, the actual
prices students pay may differ significantly from these figures.
Using data on the various forms of aid students receive, we
compute the average “net tuition” cost, which subtracts funds
students receive that need not be paid back, including grants,
tuition concessions, and tax benefits. Thus, net tuition is more
representative of the out-of-pocket expenses paid by the
Chart 3 shows the trend in published and net tuition for the
average student over time, adjusted for inflation and expressed
11 College graduates entering the labor market during recessions start their
careers earning less than those who enter in better times, and this wage
penalty can carry forward throughout their working lives (Kahn 2010).
Because the wage profiles we estimate rely on a cross-section of workers who
started their careers at different points in the business cycle, it is possible that
the lifetime earnings of those graduating during the Great Recession may not
be as high as our estimates suggest.
Annual Published and Net Tuition for Bachelor’s
and Associate’s Degrees
Total Cost of a College Degree
Thousands of dollars
Bachelor’s Degree: Four-Year Cost
Thousands of dollars
Bachelor’s net price
Associate’s net price
Sources: U.S. Bureau of Labor Statistics, consumer price index; U.S. Department
of Education, Digest of Education Statistics 2012; The College Board, Trends in
College Pricing 2013 and Trends in Student Aid 2013.
Notes: Net tuition is published tuition minus the grants, tuition concessions, and
tax benefits given to st …
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